The Repo/LIBOR Flip: What It Means for the Markets

Finadium
February 2016

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Repo and LIBOR have reversed their historical pricing relationship: repo, an observed secured short-term trade, is now more expensive than LIBOR, a theoretically priced unsecured loan transaction. The retail analogy is if credit card debt was less expensive than a home mortgage for the same borrower. This is an awkward situation that should not exist but does, and is the result of historical practice, regulatory cost pressures and the difficulty of reforming LIBOR.

The repo/LIBOR flip has implications for financial markets as well including a need to understand what rates are really available and to whom. Counterparties and credit matter, but what happens when an advertised rate is not available at all?

This report has been written for all financial market participants with interests in the secured (repo) and unsecured (LIBOR) markets. This includes interest rate derivatives investors and dealing desks, repo investors, securities lending cash collateral investors and government regulators considering how to repair LIBOR.

This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.

This report is 16 pages with 6 exhibits.

TABLE OF CONTENTS
■ Executive Summary

■ What Happened to the Repo/LIBOR Relationship?

■ A Primer on Product Structure
– Regulated or Not

■ Impacts on Market Structure
– The Cost of Financing
– The Future of LIBOR

■ About the Author

■ About Finadium